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HUBERT EDWARDS: Reigniting the debate on Bahamian taxation

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Hubert Edwards

The Bahamian taxation debate is reigniting. The country faces a narrow, and not so clear, path, but will have to confront its taxation regime soon. There is absolutely no way of getting around that fact. Unlike other commentators, I believe the options are wider than those being espoused, even if not all are positive, and the impetus for change will be “internal” rather than “external”. While confronting tax policy does not necessarily mean a change from a regressive system to a more progressive regime, there are public policy issues that - upon careful analysis - will emerge as a result of this.

In March 2021, I wrote an extensive piece under the heading A Taxing Affair Ahead. The latter portion of that article dealt with the matter of taxation policy, and the pressures that could influence a shift to the implementation of personal income and/or corporate income tax. Since then an election has come and gone, and available information suggests there is little or no desire for exploring any other forms of taxation, despite whatever compelling reasons might exist. The big question is whether this position is tenable and, if not, what options are available to The Bahamas in the face of this reluctance.

I wrote in March: “In the heights of the [COVID] crisis, a prominent economist first raised the idea of the possibility of The Bahamas entering into an IMF arrangement. The response of the governor of the Central Bank is very instructive. In seeking to assuage the tension created by that statement, he declared that before creditors get hurt taxes will be levied (paraphrase). Prominent commentators have outrightly stated that there is a need for income tax, or lament the inequity of the current regressive tax regime or its inadequacy in financing government programmes. There have been questions posed to policymakers as to whether income tax will be (or at least should be) considered. It would appear that at least in certain quarters the conversation around income taxes is becoming a bit more comfortable, and definitely more serious.”

The excitement has since died down with a general acceptance that a major structural adjustment to The Bahamas' taxation regime is currently off the cards. In my mind, the fundamental issue on which the matter of taxation should turn has not changed. The Bahamas has a massive debt burden, narrow fiscal space and very limited government revenue compared to its debt obligations, together with weakening national infrastructure and increasing demands for public goods and services. The Prime Minister foreshadowed this when he stated his desire to increase government revenue to 25 percent of gross domestic product (GDP). Take into consideration that approximately 18 percent of government revenues go towards servicing its debt. Consider that over $2bn in debt principal is due for repayment within the next two years, and that the current fiscal deficit remains largely unfunded. The question that ought to be troubling our minds is not whether the EU/US/OECD will force the country to adopt corporate income tax, but rather where will the funds come from to honour these obligations, run the country sustainably, invest in infrastructure for future growth and stave off the perennial vulnerabilities that The Bahamas faces.

Back in March I said: “It is my view that despite the lack of direct responses from the political directorate, the time is here for a real shift in the tax regime. The current circumstances [the economic realities of the country] would dictate that we take hold of the “boogeyman bag” [taxation], so as not to bring greater harm to a very vulnerable segment of poor persons. Nevertheless, even if that bag is rejected there may be increases in some other areas if the larger concerns surrounding debt default and entrance into structural programmes are to be circumvented. I believe that in the near term, the future of The Bahamas rests significantly in the strategic moves that will be made over the next few months. It is for this reason that I cite the obvious 'election season', given the propensity for shifts in policy positions or delays in making decisions that may be inconsistent with the desired outcomes of parties. It is easy to accept that in close proximity to an election the likelihood of tax increases becomes difficult to imagine.” Leading into the election, both major political parties stated unequivocally that there would be no tax increases with the eventual victor, the PLP, promising to reduce VAT and then actually implementing this rate cut. This signals very clearly how the political directorate is reading the Bahamian appetite for new taxes of any form. The subsequent implementation of the VAT reduction should be instructive. The reality is that, with an eye on the fiscal deficit, any moves that reduce revenue are not on the cards. It is simply not in the interests of The Bahamas at this time to deplete any revenue source.

The challenges are real and difficult. One has to honestly and objectively accept that the $10.4bn national debt; the emergence of external pressures; the consistent, debilitating downgrades of the country's creditworthiness; and the tension between party and what is in the best interests of the country, have placed enormous pressure on policymakers to create the correct balance. I opined back then that: “It is also easy to accept that any administration shepherding the change to income tax, or foreshadowing the same, is likely to suffer a significant level of disfavour from the electorate. The possibility, therefore, of any movement in this area within the next 12 months is therefore minuscule. Note, however, that none of the major parties will explicitly state that income tax is off the table. Any such declaration would be outright irresponsible and lacking in careful forethought. The players are aware and, therefore, while I believe they will work hard to find ways not to go this route, they will not be definitive in excluding the option. Ultimately, regardless of the VAT rate cut, the tax suffers important weaknesses when compared to the four principles of a good taxation system - fairness, certainty, convenience and efficiency. Commentators, policymakers and others readily state that the current tax regime is inequitable. We accept this, and the fact it is also insufficient, either in absolute terms or because of the level of effectiveness in its administration. A regressive tax regime in an environment where economic scarcity (persons suffering longer term from economic fall-out) is prominent will always fail to meet the fairness (equitable) criteria.”

To fairness, certainty, convenience and efficiency, I now add sufficiency. There is no argument about the current tax regime. It is regressive and, consequently, it is always going to be inequitable by nature. Other principles in The Bahamas are arguable. Convenience has certainly improved, and is improving, and we are fully aware of why we pay certain taxes and the basis of payments. Efficiency, though, remains questionable. Are we at our best in administration of the existing tax regime, thereby guaranteeing its optimal operation? Based on ongoing public pronouncements, the answer appears to be 'no'. Is the country leaving significant revenue on the table, either uncollected, improperly collected or collected and then leached? However that pans out, the result of our perennial fiscal deficits suggests clearly that government revenue and, consequently, the tax regime as currently structure is insufficient to meet the country’s needs. It is for this reason, following recent record deficits, that I put forward the idea that the internal drivers for tax reform are much stronger than the suggestions of external bodies.

These were my views in the March piece. “Chief amongst the challenges faced by the country are debt and threats by external organisations," I wrote. "The state of The Bahamas national debt draws our attention to what could emerge should there be no rebound. As noted above, there have been important questions raised by many about the sustainability of the country’s debt. With national revenues where they are today., and the challenges we have (temporary but there will be lingering effects), creditor demands will at least put adverse pressure on the provision of other public goods and services. In other words, creditors must be paid first as the country will never jeopardise its credit rating by defaulting on debt. That simply does not happen in this region. In the recent Budget presentation, it was revealed that government revenue-to-GDP is in the region of 14 percent. This is relatively low, and definitely an impact from the downturn. However, historically The Bahamas has always lagged its peers in this metric. The longstanding, and recently renewed, discussion has been the need to increase that to 20 percent (the Prime Minister recently said 25 percent). If this is correct and necessary, the question is how we will get there. One thing I am confident of is that we should all start getting prepared to pay a little bit more. The only way to get there, in the face of all we have discussed to this point, will be through new taxes, unless it can be shown that more effective administration can and will produce the difference between the two yields.”

With debt servicing eroding the productive capacity of the current narrow revenue space, we have to come to grips with where we go from here. The path to increased taxation yields is obvious. Recent pronouncements by two influential commentators, James Smith and Gowon Bowe, are instructive, important but largely externally focused. Given my observation that the Bahamian psyche is conditioned to readily reject external pressures, it may be useful to turn the conversation inward for greater effect. To Mr Bowe’s point of failing to protect the financial services industry, to have a clear strategy for the inevitable broadening of any external initiative will ultimately result in reduced revenue. Further, the inability to generate higher levels of government revenue will place debt ratings at risk and increase rollover risk, which is already very high. The regressive tax regime appears to be unsustainable for the future, but a progressive one will be highly disruptive to the country’s value proposition, which is the main concern of Mr Smith. Note, though, that we must accept the ability to fund the current - and any future - deficit is directly influenced by the willingness to demonstrate a broadening of tax revenue.

I state none of these points from the perspective of the EU/US/OECD 15 percent minimum global corporate tax initiative. This is all about where The Bahamas is, and what needs to be done to protect and fix The Bahamas. These are concerns that must actively occupy our minds as a country. We must accept that the decisions are not easy by any means. We must further accept that confronting them is an ideal but not mandatory. However, we must also agree and accept that the consequences of whatever actions are taken, or not taken, hold very serious implications for the ambitions of a recovered, resilient and sustainable economy. As an economic organism, everything must and will balance in the end. The simple accounting formula is instructive here - income less expenditure equals surplus/(deficit). In the case of The Bahamas, every point in this formula is dictated by public policy, whether explicit or derived. I anticipate that despite the balancing act required the administration will make the policy adjustments that best serve the country.

In Part II, I will consider the major points made in the recent debate around the 15% minimum global corporate tax initiative.

NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. He specialises in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management; internal audit and policy and procedures development; regulatory consulting; anti-money laundering; accounting; and strategic planning.

Comments

Proguing 1 year, 1 month ago

Be careful, because the competition will not be charging 15% corporate tax. Here is just one example:

"If a United States citizen becomes a bona fide Puerto Rican resident and moves his or her business to Puerto Rico, the income becomes Puerto Rican sourced income. This income benefits from a 4% corporate tax/fixed income tax rate, a 100% exemption on property taxes, and a 100% exemption on dividends from export services."

As a reminder we already lost Bacardi to Puerto Rico...

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sheeprunner12 1 year, 1 month ago

This is a Jamaican who wants us to go down the same road as Jamaica, with their 7 taxes on an income

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donald 1 year, 1 month ago

income tax is horrible. Bahamas already ranks very low as a business friendly country. There will no foreign investment. This basically means no investment

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